Griftopia - Matt

Taibbi
Political Economy presentation by Shauna McCaffrey, April Dickinson,
Richard Spence, Louis Chapman, Phuan Jun Hong, Lorenzo Scoglio,
Jacob Wood
Chapter 1: The Grifter Archipelago; or, Why the Tea Party
Doesn’t matter

Sarah Palin

● 9th Governor of Alaska 2006-2009

● 2008 Election Republican Party nominee for Vice President
● 2010 became a key-note speaker for the Tea Party
Chapter 1: The Grifter Archipelago; or, Why the Tea Party
Doesn’t matter
The tea party
“Common sense patriots”
The economy is self-correcting
Commerce and government should be fully separable
Against global integration

TARP = Troubled Asset Relief Program, supported by Sarah Palin yet shot down by the Tea Party when it
was suggested by Obama
Critiques have called it a “disguised white power uprising” >> emphasis on race and dog-whistle politics
Disenfranchised with what they are seeing going on in the world around them.
 Chapter 2 - Alan Greenspan
Background on Greenspan - Before the Federal Reserve:

● Left NYU to pursue a doctorate at Columbia University where he studied under future fed reserve chairman
Arthur Burns who introduced Greenspan to the beltway elite.

● After Columbia, Greenspan spent many years involved with soviet refugee Ayn Rand - a novelist/philosopher
who was the founder of the Collective movement of the 50/60s, Rand and The Collective act as an influential
force on Greenspan's ideology.

● The main philosophy of the Collective was ‘objectivism’ which incompasses pure free-market beliefs, view the
poor as lazy and a drain on society and opposes the state in all forms.

● Rand’s notorious book - Atlas Shrugged, lays the groundwork for objectivism through the character John Galt,
who has a 75 page speech in defence of self-interest and attacking self-sacrifice.

● Ironically the Randian Collective opposed the federal reserve, including Greenspan in the 50s and 60s who was
claimed to have desired a totally free banking system

● 1968 - Greenspan joins the Nixon campaign staff as an advisor on domestic policy

● 1974 - Appointed Chair of the Council of Economic Advisers for the Ford administration.

● 1981 - Reagan appoints Greenspan to head the national commission to social security reform.
 Chapter 2: Greenspan becomes Chairman of the Federal
Reserve - 1987
● 1987 - Reagan nominates Greenspan as Fed reserve chief because Reagan wanted someone who can work more
closely with the government. Sworn in August 1987

● Greenspan taking office marked the start of the bubble economy.

● One of the most decisive moves of Greenspan's early days as Fed Chairman was reforms to social securities - tax hikes
in social securities to create tax revenue to buy T-bills which effectively funded Reagan's deficit spending - $1.69
trillion in regressive taxes over next 20 years.

● This process dried up physical assets of the Fed to the extent to which that during the George W Bush administration
social security fund had no assets remaining.

● In response, Greenspan suggested in 2004 to cut welfare benefits, medicare allowances and increase pension age -
this social security ploy that played out over the decades has since been described as a classic ponzi scheme.

● Greenspan was also famed for his many false predictions over the years.
 Chapter 2: Bubble after Bubble
● Financial services inflated one speculative bubble after another and when
they burst in Greenspan would sweep in and flood Wall Street with more
money by cutting federal reserve rate - “Drinking yourself sober”

● Author suggests Greenspan’s biggest contribution to the bubble economy

was phycological - As federal reserve chief he could of altered history by
stating out loud that stock market was overvalued

● Dec 1996 - Irrational exuberance speech - caused mini panic in wall street

● Green span defended stock price values by saying the lack of actual
physical value of stock was overcome by the inherent value of their ‘ideas’
- author says “this is like saying concrete becomes gold when you paint it
yellow”

● The Greenspan Put - Play on words on traditional stock put, the

Greenspan Put relates to Wall Street view that if the market drops too low
Greenspan will step in and lend money.
 Chapter 2: Greenspan and the Global Financial
●
Crisis
1998 - Violation of the Glass Steagall act - The ilegal merger of an investment bank and insurance company, which put enormous sums of capital
in the hands of a single mega company - conflict in interest whereby insurers and investment banks could promote stocks that benefit the banks
rather than consumers.

● Greenspan and fed temportaily allowed merger to occur with conditions of 3 year period to divest holdings in insurance company - This allowed
time to pass new legislation that allows such capital concentration to be legal - The Gramm-Leach-Bliley Act

● 2000 - The Commodities Futures Modernization Act (CFMA) - Firmly deregulated the derivatives markets.

● Feb 2004 - Greenspan tells Americans that adjustable rate mortgages are a good product and are safer than traditional fixed rate mortgages -
timing of speech near end of rein at federal reserve - he knew that they were about to start increasing interests rates (June 2004 for 17
consecutive time - from 1% to 4.5%) - gifting banks in his final days by screwing the americans he herded into risky flexible mortgages.

● 2003 – 2005: outstanding mortgage debt in US grew by 3.7 trillion dollars – entire value of real estate in America in 1990 = 3.8 trillion –
borrowed equivalent of 200 years of savings in just 2 years

● “Greenspan era a crime story with rigged games that Americans were doomed from the start to lose.”
Chapter 3 - Hot Potato
- Subprime mortgages
(Credit Score < 660);
- NINJA Loans (No Income, No
Job or Assets);
- There are several cases of
falsified documents,
allowing non suitable
applicants to borrow the
money anyway.
 The bottom of the predator chain
- Homeowners: lots of them were buying houses just to speculate on the
increasing prices;

- Lenders and brokers: Constantly falsifying documents and trying to grift the
applicants proposing them the worst deals, such as Subprime Option-ARMs,
which pay higher commissions than common mortgages.

But how do you make a profit from a mortgage that will never be paid back?
 The top of the predator chain
Investment banks:
Securitization of
mortgages and
Collateralized Debt
Obligations (CDOs).

Rating Agencies: Ranking

the Mortgage-based
CDOs as AAA, as they
were financially
dependent from the
banks and received high
bonuses and fees
 American Insurance Group’s Bailout
Two departments of AIG were doing terrible things:

1. AIG Financial Products was selling billions worth of Credit Default Swap on Mortgage-bonds, placing a
bet they did not have the money to cover;

2. AIG’s Asset Management Department was lending securities and investing the collaterals in
Mortgage-bonds, to obtain higher returns.

When the price of Mortgage-bonds plummeted AIG had huge losses and risked the bankruptcy.
The Government saved it with more than $200 billion, which are just a small part of the $13 trillion it had
to spend to save the American Economy.
 Chapter 4 - Blowout: The
Commodities Bubble
Media attention at the time could not provide a reasonable cause for the price spike due to most of
the media focusing on US politics. The most common cause was thought to be increased demand
from China or oil shortages.

However the actual cause was due to Wall Street in what was known as ‘Commodity Index
Investing’.

Speculators are in the market are there originally to make sure buyers and sellers of commodities
have somewhere that they can buy/sell. Therefore avoiding disruption in the market. In the 1990s,
speculators gained a more active role in the market, as their sole purpose was not to just help
avoid disruption in the market, but to also make money from the market.

With ‘Commodity Index Investing’, speculators purchased massive amounts of commodity future
contracts, betting that commodity prices will rise over time. To carry out this type of Investing, it
had to be done through an Investment Banks.
Chapter 4 - Blowout: The
Commodities Bubble
Taibbi mentions it was strange that these banks thought
commodity prices would fall, as surely technological
improvements over time would lead to falling commodity
prices.

Investment banks convinced investors that oil prices would

rise regardless, leading to huge investors flows into the
commodity markets, which then actually does raise prices,
leading to a self-fulfilling prophecy. The banks then make a
huge profit with the bets they’ve placed, while everyone else
pays unextraordinary high oil prices.
Chapter 5 - The outsourced Highway:
Wealth funds
Wealth Funds or Sovereign Wealth Funds (SWF)

- A giant state-owned pile of money

- Popular with Oil rich countries; Act like Hedge Funds

Investment in American infrastructure

- SWFs began to buy up infrastructure, Taibbi’s examples: A highway in FL; Parking Meters in
Nashville; Port in VIR
- Financial Colonisation of America?

Chicago Parking Meters LLC

- A SWF supported by Morgan Stanley bid a lease on these parking meters, valued at $1.2 Billion,
this was found to be undervalued and undersold by $974 Million
Chapter 6 - The Trillion Dollar Band
aid
Obamacare
● January 2010
○ Nancy Pelosi
● Design
American Healthcare System

● Mounting costs of paperwork

○ Full 31% of all healthcare spending in the US
● Lack of federal regulation
● Horizon Blue Cross
○ Operates in New Jersey
○ Power over hospitals
● McCarran-Ferguson act
American Insurance Industry

● Hurricane Katrina
○ Mississippi insurance reform
● Obama reforms
● Congressional Committees
○ Louise Slaughter’s reppeal
Obama’s Presidency

● 60 vote majority
● Won liberal states
● Broken promises
○ Drug Imports
○ Cadillac plans
● Final push for democrats
○ $100 million a vote
● Republican’s played a role
Chapter 7 :The Great American Bubble
Machine
Goldman Sachs

● Founded in 1882
● Founder: Marcus Goldman and Samuel Sachs (son-in-law)
Brian Griffiths, Goldman Sachs international adviser (2009):
“the injunction of Jesus to love others as ourselves is an endorsement of self-interest” and “We have to tolerate
inequality as a way to achieving greater prosperity and opportunity for all.”
Summary of GS contribution
● Playing an intimate role in three historic bubble catastrophes
● Helping $5 trillion in wealth disappear from the NASDAQ in the early part

of the 2000s
● Pawning off thousands of toxic mortgages on pensions and cities
● Helping 100 million new people around the world join the ranks of the

hungry
● Securing tens of billions of taxpayer dollars through a series of bailouts
➢ Early Ages….

➢ Pioneer in the use commercial paper, lending out short-term IOUs to small-time

vendors in downtown Manhattan.

Goldman Sachs Trading Corporation; the bank issued a million shares at $100
apiece, bought all those shares with its own money, and then sold 90% of the fund
to the hungry public at $104.
Sponsored Shenandoah
Shenandoah sponsored Blue Ridge
Endless pyramid, Goldman behind Goldman ……..
7,250,000 initial shares of Blue Ridge, 6,250,000 owned by Shenandoah;
Shenandoah was in large part owned by Goldman Trading.
 ➢ GS changed its underwriting standards
● Basic standard to bring company public
➢ Company should exist at least 5 years
➢ Its profitable for at least three years in a row
➢ It had to be making money at the time of IPO

● Escape responsibility and legal problems by paying fines

● $40 million fine in 2005 to SEC (Securities and exchange commission)

➢ Internet Bubble / Net Boom
1. Laddering Practice
2. Spinning
3. The practice of “soft-dollar commission”

● These factors lead to the Internet bubble into one of the

greatest financial disasters in world history.
● More than $5 trillion of wealth was wiped out on the
NASDAQ alone
● Public wealth evaporates and large job losses.
 ➢ Housing Bubbles
● Issuing mortgage-based investment vehicles, which is pure crap, loans

underwritten according to a pyramid of lies and fraudulent information.

● Selling “crap” to customers
● At the same time, take short positions in the same market.
● GS “love” the investors who bought their horseshit CDOs by betting against its

own crappy product, then it turned around and “love” the taxpayer by making
him pay off those same bets
➢ Goldman-engineered scam
● GS help Bear Stearns, Fannie Mae and Freddie Mac, but Paulson elects Lehman Brothers (one

of Goldman’s last competitors) collapse without intervention.

● Reshape the competitive on Wall Street
● Only Goldman and Morgan Stanley are left standing
● Throughout that crisis period, GS and Morgan Stanley lobby the government to impose

restrictions on short sellers who were attacking their companies.

➢ The government might let other players on the market to die, but they would save GS in a time

of need.
➢ Supreme privilege--- The government would always save GS.

➢ Borrow money at 3% from Fed and lend it at 5%.

➢ Taxes
● In 2008, GS paid 1 % effective tax.

● Ship revenue offshore and defer taxes on those revenues indefinitely

● Government Accountability Office report, between 1998 and 2005, 2/3 of all corporations

operating in US paid NO TAXES at all.

Additional Chapter: The Grift goes on
Introduction: Why has nobody gone to jail for the GFC?
- Rich and well-defended eg. Richard “the gorilla” Fuld
- It wasn’t technically illegal - they bought the opinion it was legal
- The public decided these people weren’t guilty

Looting Main street

- Jefferson county, Alabama financial disaster
- Funding state-of the-art sewage system
- Big banks took advantage of the county’s extreme debt
- Had to be helped by raising sewer rates
- Ended up with a downgraded credit rating and $4,800 debt per person

Invasion of the Home Snatchers

- Kangaroo courts set up in Florida to sort through foreclosure case, Florida set aside
$9.6 Million to create the courts with the aim of clearing 62% of foreclosure cases.
- The process of reclaiming these homes were heavily reliant on ‘Robo-signers’ and a
biased court system in favour of the big lenders.
- ‘The defense never gets more than one chance to screw up’
References
Taibbi, M. (2011) Griftopia: A story of bankers, politicians, and the most audacious power grab in
American history. 2nd ed. New York: Spiegel & Grau.